Fitch Downgrades Italy to 'BBB+' with Negative Outlook

The international ratings agency Fitch said Friday it had downgraded Italy's sovereign debt rating by one notch to "BBB+" from "A-" and added that the outlook was negative.

Fitch pointed in particular to "the inconclusive results of the Italian parliamentary elections on 24-25 February" which "make it unlikely that a stable new government can be formed in the next few weeks."

Italy's vote left the country in a political deadlock, with no party or coalition able to form a government on its own, and party leaders have made little progress in talks so far.

While the center-left coalition won in the lower house, its failure to take the Senate has left leader Pier Luigi Bersani scrabbling to reach an agreement with the anti-establishment Five Star Movement (M5S) to form a minority government.

The M5S founder, comedian Beppe Grillo, has unnerved markets and foreign investors with his attacks on unpopular austerity policies imposed on Italy by a technocratic government last year to tackle the debt crisis, as well as his call for a referendum on eurozone membership.

Bersani's refusal to form an alliance with Silvio Berlusconi's center-right party -- which came a close second in the election -- has also left many analysts fearing the country may be forced to return to the polls before long.

The uncertainty has not been reflected on stock markets until now, but should Italy slip back into the debt mire it could have a knock-on effect on other vulnerable countries that use the euro currency.

Italy's borrowing costs rose slightly to 4.599 percent on 10-year government bonds from 4.596 percent just before Fitch's announcement.

"The political uncertainty following the Italian parliamentary elections on 24-25 February is part of a normal democratic process," Italy's Finance Ministry said in a statement in English reacting to the Fitch downgrade.

"We reaffirm the confidence that Italy will find the political solutions and will therefore continue the undergoing reform process. In the meantime, the present government remains of course in place for current affairs," it said.

Fitch also noted that Italy's ongoing recession "is one of the deepest in Europe," and warned that "the increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy."

The agency also forecast that Italy's public debt, one of the eurozone's biggest, would peak this year at close to 130 percent of GDP (gross domestic product), worse than Fitch's previous estimate of 125 percent.

It added that the economy was likely to shrink by 1.8 percent this year, in the wake of a 2.4 percent contraction in 2012, and said that "a weak government could be slower and less able to respond to domestic or external economic shocks."

Fitch's "BBB+" rating nonetheless leaves Italian debt in the investment grade category, and on the bright side, it underscored the country's "relatively wealthy, high value-added and diverse economy with moderate levels of private sector indebtedness."

Rome has also made considerable progress with fiscal consolidation in the past two years, the agency noted, estimating that Italy's public debt would fall to around 2.5 percent of GDP this year.

That "would be close to the constitutional requirement of a balanced budget," and would put Rome below the eurozone public deficit ceiling of 3.0 percent of GDP.

Unemployment in Italy is at a record 11.2 percent and official data this month showed that the economy shrank by 2.4 percent last year, while public debt rose to 127 percent of GDP from 120.8 percent in 2011.

The head of Italy's main business federation warned in February that the next six months will be the worst for the country in 50 years as the economic crisis reaches its peak.

Giorgio Squinzi, the head of the Confindustria lobby, called for "shock therapy" for Italy, with tax cuts and immediate payment of debts that the state has accrued with the private sector, and dismissed the M5S's idealistic economic proposals.